Trends in Japanese foreign direct investment

By Masako Takahata, Japan In-house Lawyers Association
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Japanese companies are key players in foreign direct investment. In 2020, FDI outflow from Japan was US$222.5 billion, which makes the country the largest investor in the world. Japanese investments are focused in Europe and North America, in various sectors including finance and insurance, electrical machinery, transportation equipment production, chemicals and pharmaceuticals.

While the government is keen on promoting imports and investments in Japan, FDI inflows to the country remain low compared with other developed nations around the globe, reaching US$14.5 billion according to the UN Conference on Trade and Investment’s (UNCTAD) “World Investment Report 2020”.

Due to the covid-19 pandemic, FDI flows to and from most countries have declined. Many Japanese multinational companies are suffering from falling corporate earnings, and postponing their investment plans. Lockdown measures, suspended business operations and closed factories have impacted supply chain and factory production, which has prompted investors to rethink their investment strategies.

Nevertheless, Japan remains an attractive market for investors because it has the third-largest economy in the world, and a steadily growing one, with strong domestic demand. The country is also a leader in high technology, research and development, with the largest number of patents and highly skilled workers dedicated to their companies and protected by employee-friendly labour regulations.

FDI Restrictions

FDI restrictions in Japan are relatively moderate, except for the recent amendment of the Foreign Exchange and Foreign Trade Act (FEFTA), which requires foreign investors to notify the government of their investments in Japanese listed companies. Similar to the US’ Foreign Investment Risk Review Modernisation Act of 2018, which expanded the jurisdiction of the Committee on Foreign Investment in the US, and the EU’s 2019 Framework Regulation for the screening of foreign investments, this amendment to the FEFTA was a response to growing global concerns about national security and the leakage of technology.

In general, Japanese markets are open to any foreign investors. The potential barriers to making investments are derived from traditional ways of doing businesses, some of which are connected to the country’s geographical or historical uniqueness.

For Japanese investors, it is important to learn more about the FDI restrictions in each country into which they invest. Looking at countries outside Japan, there are a wide variety of regimes for foreign investment that a Japanese company may not expect, such as restricted ownership of plots of the land, and required additional reports regarding environmental assessment and social investigation.

Economic and trade agreements

At the early stage of the investment decision-making process, a Japanese company should take a look at the signatory list of bilateral or multilateral treaties that concern Japan. Apart from some sector-specific commercial issues, these economic partnership agreements (EPAs) and free trade agreements (FTAs) provide some measures to promote trade and protect investment.

Japan is a signatory to 21 EPAs and FTAs, including the Regional Comprehensive Economic Partnership (RCEP). A list of

conventions signed by Japan help Japanese investors to understand the features of the country to invest in, and to review the investment scheme, to avoid undue burden or conflict with the foreign government should something go wrong.

Dispute resolution mechanisms

Dispute resolution clauses are barely discussed among business unit colleagues, even if legal counsel should be paying attention to them. Due to the New York Arbitration Convention on the Recognition and Enforcement of Arbitral Awards of 10 June 1958, arbitration clauses are written into contracts in every industry.

In case of an international commercial contract, most of the parties are prone to choose an arbitration proceeding rather than litigation under a local court’s jurisdiction, which is often unfavourable to the foreign investors due to language barriers and strict local rules that may be unpredictable for foreign investor decisions.

If an arbitration is chosen as the preferred dispute resolution method, it is recommended that parties wishing to make reference to an institutional arbitration decide which institution to use, and adapt the standard languages provided in its website. It may be desirable for the parties to stipulate the place and language of the arbitration, and the law governing the underlying contract, as well as the law governing the arbitration agreement.

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In September 2020, the UN Convention on International Settlement Agreements Resulting from Mediation (the Singapore Convention on Mediation) came into force. Mediation can be a better option to solve problems in a cost and time-effective way. Japan is not yet a signatory, however. The Singapore Convention on Mediation should facilitate the growth of cross-border commercial investment and promote the use of mediation.

For most investors, it is important to be knowledgeable about options of dispute settlement proceedings that are user-friendly, and internationally recognised impartial adjudicators and practitioners.

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